Trump’s uncanny political instincts and his ruthless “amorality”—A Formidable Challenge


October 28, 2018

Trump’s uncanny political instincts and his ruthless “amorality”—A Formidable  Challenge to Blue Democrats.

by Dr. Fareed Zakaria

ttps://fareedzakaria.com/columns/2018/10/25/trump-owns-the-bloody-crossroads-of-american-politics

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“Democrats create mobs, Republicans create jobs” has become a rallying cry for Republicans ahead of the midterms

For those who believe that President Trump is a clownish know-nothing who somehow tapped into the mood of the electorate, or just got lucky in 2016, the last month has been instructive. Trump has demonstrated uncanny political instincts.  When combined with his ruthless “amorality” — a term used by one of his own senior officials in an anonymous New York Times op-ed — he presents a formidable challenge to his opponents.

Trump faces a familiar landscape. The party that holds the White House traditionally has low turnout and does badly in the midterm elections. But rather than accept this as inevitable, Trump has been aggressively trying to beat the odds. He’s turned what are usually disparate races in the House and Senate into a single national election, fought on an agenda that he has defined.

Item one on his agenda is immigration. The reason is obvious: The issue rouses his voters like no other. Trump campaigns relentlessly on it, making the false accusation that if the Democrats win, they will open up the borders and let everyone in.

PHOTO: President Donald Trump along with Republican Senator from Wyoming John Barrasso (L) and Republican Senate Majority Leader from Kentucky Mitch McConnell (R), walk to a Republican Senate luncheon in the U.S. Capitol on Nov. 28 2017.

He has used the current caravan of Central American migrants to highlight his case against the Democrats. Since Republicans are also still highly motivated by fears of terrorism, Trump threw in the accusation that there are “Middle Easterners” in the caravan. (First, there is no evidence for that claim, which Trump himself even admits; and second, if there were, it is an ugly slur to imply that any Middle Easterner is a terrorist.) As the media eagerly fact-checks his rhetoric, Trump seems well aware that they are incidentally repeating his claims and reinforcing the suspicion and fear in the public’s mind.

The second way Trump has turned the midterms into a national vote is by raising the specter of impeachment. Nothing would anger his base more than the notion of an elitist conspiracy (of lawyers, journalists and judges) determined to undo the results of the 2016 election. White House press secretary Sarah Sanders declared that impeachment is “the only message [the Democrats] seem to have going into the midterms.”

Trump’s midterm strategy was foreshadowed by Stephen K. Bannon several months ago, when he explained, in an interview with me on CNN, that the Republicans needed to turn the midterms into a referendum on Trump. “Trump’s second presidential race will be on Nov. 6 of this year,” Bannon said. “He’s on the ballot, and we’re going to have an up-or-down vote.”

How does one counter this campaign? Many Democrats angrily maintain that they do not, in fact, favor open borders and impeachment — that their positions are more nuanced. But when you are explaining nuance in politics, you are losing. The Democratic Party has not found a way to go on the offensive and get Trump to explain that he has, in fact, a more complicated position on any given topic.

But there is a substantive problem in addition to one of style and tactics. The Democratic Party is insisting that recent election results are an unmistakable sign that it needs to change course and become far more populist on economics. But the data clearly show that the American public is very comfortable with where the party is on issues such as health care and inequality.

The challenge for the Democrats is a set of cultural issues — chiefly immigration, but also things such as transgender bathroom laws and respecting the flag — on which a key group of Americans thinks the Democrats are out of touch. An excellent study by the Democracy Fund found that people who had previously supported Barack Obama and then voted for Trump in 2016 (a crucial segment that Democrats could win back) agreed with the Democrats on almost all economic issues but disagreed with the party on immigration and other cultural matters.

Put simply, the study makes clear that the challenge for the Democratic Party politically is not whether it can move left economically but whether it can move right on culture. I say this as someone who agrees with the Democrats on almost every one of these cultural issues. But a large national party must demonstrate that it can accommodate some people who disagree with it on some issues. Doing this without abandoning one’s core principles is a challenge, but it is a challenge Democrats will have to embrace if they seek a durable governing majority.

Eventually, the electorate will be more young and diverse, but in the meantime, the Republican Party is utterly dominant in American politics because it owns the bloody crossroads where culture and politics meet.

 (c) 2018, Washington Post Writers Group

Safeguarding A Rules-based Trading System against America First Trade Economics


October 16, 2018

Safeguarding A Rules-based Trading System against America First Trade Economics

by Dr. Mari Pangestu, Universitas Indonesia

http://www.eastasiaforum.org

 

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“Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.”–Dr. Mari Elka Pangestu

Despite expectations that the US Federal Reserve would raise interest rates, capital flows to the United States have led to the appreciation of the US dollar against most major currencies.

The hardest hit countries are Argentina and Turkey, which are experiencing fiscal issues complicated by their political situations. Brazil, South Africa and the emerging countries in Asia have also been affected — albeit at a lower rate of depreciation of their currencies in the 10 to 12 per cent range. Even Australia and China have experienced depreciation of around 8 per cent and 5 per cent respectively.

The level of depreciation experienced by different economies reflects how investors perceive their different fundamental macroeconomic conditions, especially the level of their current account and fiscal deficits and policy outlooks.

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The rising US dollar raises questions about the capacity of emerging economies to service their dollar-denominated debts and the vulnerabilities this could expose in their financial systems. Even if the current economic conditions point to a low potential for contagion from Argentina and Turkey, IMF Managing Director Christine Lagarde recently warned that ‘these things could change rapidly’. The uncertainty that already exists is a clear and present danger.

The uncertainty in the world economy has been increasing since Brexit and the election of President Trump in 2016, and in 2017 as the United States left the Trans-Pacific Partnership and announced many threats to impose trade restrictions. This uncertainty has heightened since January 2018 when US President Donald Trump made good on his threats to remedy bilateral trade deficits — what he sees as ‘unfair trade’ practices against the United States — by imposing tariffs on imported solar panels and washing machines, followed by aluminium and steel.

Since March, the greatest uncertainty has been from the brewing tit for tat trade conflict between the United States and China, which started with the imposition of 25 per cent tariffs on US$50 billion worth of China’s exports to the United States. China retaliated with the same sized tariffs on the same amount of trade from the United States. Trump then escalated the trade war further in September with the announcement of 10 per cent tariffs on US$200 billion worth of China’s exports to the United States.

The US–China trade conflict and the uncertainty surrounding it is expected to have knock on effects on global trade and investment flows. The impact of the reduction in China’s exports to the United States on China’s growth will reduce China’s imports, which in turn will impact the many countries that China has become a major trading partner for.

This means that China and other countries facing US trade restrictions will look for new markets for their goods. The situation has already led some countries to impose restrictions or initiate trade remedy investigations, for instance on steel. This uncertainty has and will continue to influence trade and investment, as businesses evaluate how the increased restrictions will affect their supply chains.

It is too early to tell how large the disruption will be, as it is not easy to dismantle supply chains. But the costs down the line could be great as businesses re-evaluate their trade and investment decisions to insulate themselves from tariffs rather than to maximise their competitiveness.

The most concerning aspect of all this is that, after 75 years of being its greatest advocate, the United States is now the biggest threat to the future of the rules-based trading system that has provided predictability and fairness in the way the world engages in trade. There is no clear light at the end of the tunnel.

The key question is: what is Trump’s intention? Is it to change the rules of the game to benefit the United States and address China’s ‘non-market-oriented policies’ or is it just anti-trade and America First? Assuming it is the former, there are at least three important responses needed.

First is safeguarding the stability of the World Trade Organization (WTO) as the overarching framework to provide predictability, fairness and stability. To this end, it is vital that the WTO dispute settlement mechanism continues to operate. The test case is the Chinese and EU case against US steel and aluminium tariffs and getting past the blocking of panel judge nominations by the United States.

Ensuring that the United States does not use blunt unilateral instruments to address its concerns also means that reforms to the WTO rule book are needed. More must be done to address concerns around intellectual property rights, investment, the environment, labour, competition policy, subsidies, tax, digital data and the treatment of developing countries.

Second, the process of opening-up must continue, with or without the United States. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a good start. And it is of the utmost importance that the Regional Comprehensive Economic Partnership negotiations are concluded in November this year. These are all important processes to signal the continued commitment of East Asia to expanding markets and fostering flows of trade and investment.

Third, and what most will agree is the most important process, is unilateral reforms. Given increased global uncertainty and limited policy space for fiscal stimulus, structural reforms are a must for East Asian countries, especially China. These range from trade and investment reforms, as well as reforms related to competition policy, intellectual property, the role of state-owned enterprises and sustainability. As in the past, unilateral reforms are more successfully undertaken when there is peer pressure and benchmarking from international commitments.

Without concerted effort and a coalition of willing leadership, including from the EU and East Asia, the future of the rules-based trading system will remain under threat.

Dr. Mari Pangestu is former Indonesian trade minister and Professor at the University of Indonesia.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.

Will Trump’s Trade War Make America Great Again?


July  19, 2018

Will Trump’s Trade War Make America Great Again?

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The United States has had the world’s largest trade deficit for almost half a century. In 2017, the US trade deficit in goods and services was $566 billion; without services, the merchandise account deficit was $810 billion.

The largest US trade deficit is with China, amounting to $375 billion, rising dramatically from an average of $34 billion in the 1990s. In 2017, its trade deficit with Japan was $69 billion, and with Germany, $65 billion. The US also has trade deficits with both its NAFTA partners, including $71 billion with Mexico.

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Economist Professor Dr. Kwame Jomo Sundram

President Trump wants to reduce these deficits with protectionist measures. In March 2018, he imposed a 25% tariff on steel imports and a 10% tariff on aluminium, a month after imposing tariffs and quotas on imported solar panels and washing machines. On 10 July, the US listed Chinese imports worth $200 billion annually that will face 10% tariffs, probably from September, following 25% tariffs on $34 billion of such imports from 7 July.

Do US trade deficits reflect weakness?

The usual explanation for bilateral trade deficits is price differentials. However, the US accuses such countries of ‘unfair’ trade practices, such as currency manipulation, wage suppression and government subsidies to boost exports, besides blocking US imports.

Trump views most trade deals such as NAFTA as unfair. His team insists that renegotiating trade deals, ‘buying American’, a strong dollar and confronting China will shrink US trade deficits.

But the country’s overall trade deficit, offset by capital inflows, is related to the gap between its savings and investments. The US spends more than it produces, thus importing foreign goods and services. Cheap credit fuels debt-financed consumption, increasing the trade deficit.

Total US household debt rose to $13.2 trillion in the first quarter of 2018, the 15th consecutive quarter of growth in the mortgage, student, auto and credit card loan categories. American consumer debt was more than double GDP in 2017.

US government budget deficits have also been growing. From 67.7% of GDP in 2008, US government debt rose to 105.4% in 2017. The federal budget deficit was $665 billion in FY2017, rising 14% from $585 billion in FY2016.

The US budget deficit was 3.5% of GDP in 2017. According to the US Congressional Budget Office, it will surpass $1 trillion by 2020, two years sooner than previously projected, due to Trump tax cuts and spending increases.

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Dr. Anis Chowdhury, Adjunct Professor of Economics  at Western Sydney University (Australia)

The growing US economy may also increase the trade deficit, as consumers spend more on imported goods and services. The stronger dollar has made foreign products cheaper for American consumers while making US exports more expensive for foreigners.

These underlying economic forces have become more important than policies in raising the overall trade deficit, while bilateral deficits reflect specific commercial relations with particular countries. Thus, disrupting bilateral trade relations may only shift the trade deficit to others.

Have the cake and eat it?

So, why does the US have a structural trade deficit? As the de facto international ‘reserve currency’ after the Second World War, the US has provided the rest of the world with liquidity. Its perceived military strength means it is also seen as a safe place to keep financial assets. Of about $10 trillion in global reserves in 2016, for example, around three fifths (60 per cent) were held in US dollars.

US supply of international liquidity by issuing the global reserve currency offers several economic advantages. It also earns seigniorage from issuing the main currency used around the world, due to the difference between the face value of a currency note and the cost of issuing it.

With growing foreign demand for dollars, the US can run deficits almost indefinitely by creating more debt or selling assets. Demand for dollar-denominated assets, for example, US Treasury bonds, raises their prices, lowering interest rates, to finance both consumption and investment.

While foreign investors buy low-yielding, short-term US assets, Americans can invest abroad in higher-yielding, long-term assets. The US usually reaps higher returns on such investments than it pays for debt, labelled America’s ‘exorbitant privilege’.

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” As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.

The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance”.–Jomo and Anis

Thus, for the US to enjoy the ‘exorbitant privilege’ of the dollar’s role as the major reserve currency, it must run a chronic trade deficit. Therefore, giving up the dollar’s global reserve currency status will have major implications for the US economy, finances and living standards.

Can the US win Trump’s trade war?

Barry Eichengreen noted that countries in military alliances with reserve-currency issuing countries hold about 30% more of the partner’s currency in their foreign-exchange reserves than countries not in such alliances. Instead, Trump has prioritized reducing trade deficits to strengthen the US dollar and dominance while disrupting some old political alliances.

As the US retreats from the global diplomatic stage, use of other reserve currencies, including China’s renminbi, has been growing, especially in Europe and Africa. Thus, ironically, as Trump wages trade wars on both foes and friends, China will probably gain, both geo-politically and economically.

The resulting global economic shift will not only hurt the US dollar and economy through the exchange rate and borrowing costs, but also its geopolitical dominance.


Anis Chowdhury
, Adjunct Professor at Western Sydney University (Australia), held senior United Nations positions in New York and Bangkok.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development. In 2007, he was awarded received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He was recently appointed a member of Prime Minister Dr. Mahathir Mohamad’s Eminent Persons Council on Strategy and Policy.

 

 

Is Capitalism a Threat to Democracy?


July 2, 2018

Is Capitalism a Threat to Democracy?

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The idea that authoritarianism attracts workers harmed by the free market, which emerged when the Nazis were in power, has been making a comeback.

 

In London, in the nineteen-thirties, the émigré Hungarian intellectual Karl Polanyi was known among his friends as “the apocalyptic chap.” His gloom was understandable. Nearly fifty, he’d had to leave his wife, daughter, and mother behind in Vienna shortly after Austria lurched toward fascism, in 1933. Although he had long edited and contributed to the prestigious Viennese weekly The Austrian Economist, which published such celebrated figures as Friedrich Hayek and Joseph Schumpeter, he had come to discount his career as a thing of “theoretical and practical barrenness,” and blamed himself for failing to diagnose his era’s crucial political conflict. As so often for refugees, money was tight. Despite letters of reference from eminent historians, Polanyi failed to land a professorship or a fellowship, though he did manage to earn thirty-seven pounds co-editing an anti-fascist anthology, which featured essays by W. H. Auden and Reinhold Niebuhr. In his own contribution to the book, he argued that fascism strips democratic politics away from human society so that “only economic life remains,” a skeleton without flesh.

In 1937, he taught in adult-education programs in Kent and Sussex, commuting by bus or train and spending the night at a student’s house if it got too late to return home. The subject was British economic history, which he hadn’t much studied before. As he learned how capitalism had challenged the political system of Great Britain, the first nation in the world to industrialize, he decided that it was no accident that fascism was infecting countries as disparate as Japan, Croatia, and Portugal. Fascism shouldn’t be “ascribed to local causes, national mentalities, or historical backgrounds,” he came to believe. It shouldn’t even be thought of as a political movement. It was, rather, an “ever-given political possibility”—a reflex that could occur in any polity experiencing a certain kind of pain. In Polanyi’s opinion, whenever the profit-making impulse becomes deadlocked with the need to shield people from its harmful side effects, voters are tempted by the “fascist solution”: reconcile profit and security by forfeiting civic freedom. The insight became the keystone of his masterpiece, “The Great Transformation,” which was published in 1944, as the world was coming to terms with the destruction that fascism had wrought.

robert kuttner

Today, as in the nineteen-thirties, strongmen are ascendant worldwide, purging civil servants, subverting the judiciary, and bullying the press. In a sweeping, angry new book, “Can Democracy Survive Global Capitalism?” (Norton), the journalist, editor, and Brandeis professor Robert Kuttner (pic above) champions Polanyi as a neglected prophet. Like Polanyi, he believes that free markets can be crueller than citizens will tolerate, inflicting a distress that he thinks is making us newly vulnerable to the fascist solution. In Kuttner’s description, however, today’s political impasse is different from that of the nineteen-thirties. It is being caused not by a stalemate between leftist governments and a reactionary business sector but by leftists in government who have reneged on their principles. Since the demise of the Soviet Union, Kuttner contends, America’s Democrats, Britain’s Labour Party, and many of Europe’s social democrats have consistently tacked rightward, relinquishing concern for ordinary workers and embracing the power of markets; they have sided with corporations and investors so many times that, by now, workers no longer feel represented by them. When strongmen arrived promising jobs and a shared sense of purpose, working-class voters were ready for the message.

Born in 1886 in Vienna, Karl Polanyi grew up in Budapest, in an assimilated, highly cultured Jewish family. Polanyi’s father, an engineer who became a railroad contractor, was so conscientious that when his business failed, around 1900, he repaid the shareholders, plunging the family into genteel poverty. Polanyi’s mother founded a women’s college, hosted a salon, and had a somewhat chaotic personality that a daughter-in-law once likened to “a book not yet written.” At home, as Gareth Dale recounts in a thoughtful 2016 biography, the family spoke German, French, and a little Hungarian; Karl also learned English, Latin, and Greek as a child. “I was taught tolerance not only by Goethe,” he later recalled, “but also, with seemingly mutually exclusive accents, by Dostoyevsky and John Stuart Mill.”

After university, Polanyi helped to found Hungary’s Radical Citizens’ Party, which called for land redistribution, free trade, and extended suffrage. But he remained enough of a traditionalist to enlist as a cavalry officer shortly after the First World War broke out. At the front, where, he said, “the Russian winter and the blackish steppe made me feel sick at heart,” he read “Hamlet” obsessively, and wrote letters home asking his family to send volumes of Marx, Flaubert, and Locke. After the war, the Radical Citizens took power, but they fumbled it. In the short-lived Communist government that followed, Polanyi was offered a position in the culture ministry by his friend György Lukács, later a celebrated Marxist literary critic.

When the Communists fell, pogroms broke out, and Polanyi fled to Vienna. “He looked like one who looks back on life, not forward to it,” Ilona Duczynska, who became his wife, remembered. Duczynska was a Communist engineer, ten years younger than he was. She had smuggled tsarist diamonds out of Russia in a tube of toothpaste and once borrowed a pistol to assassinate Hungary’s Prime Minister, though he resigned before she could shoot him. She and Polanyi married in 1923 and soon had a daughter.

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Karl Polanyi and Nobel Laureate in Economics Joseph E. Sitglitz

These were the days of so-called Red Vienna, when the city’s socialist government was providing apartments for the working class and opening new libraries and kindergartens. Polanyi held informal seminars on socialist economics at home. He started writing for The Austrian Economist in 1924, and he was promoted to editor-in-chief a few months before the right-wing takeover sent him into exile. Duczynska remained in Vienna, going underground with a militia, but, in 1936, she, too, emigrated, taking a job as a cook in a London boarding house. In 1940, Bennington College offered Polanyi a lectureship, and he left for Vermont, where his family soon joined him and he began to turn his lecture notes into a book. “Not since 1920 did I have a time so rich in study and development,” he wrote.

Polanyi starts “The Great Transformation” by giving capitalism its due. For all but eighteen months of the century prior to the First World War, he writes, a web of international trade and investment kept peace among Europe’s great powers. Money crossed borders easily, thanks to the gold standard, a promise by each nation’s central bank to sell gold at a fixed price in its own currency. This both harmonized trade between countries and stabilized relative currency values. If a nation started to sell more goods than it bought, gold streamed in, expanding the money supply, heating up the economy, and raising prices high enough to discourage foreign buyers—at which point, in a correction so smooth it almost seemed natural, exports sank back down to pre-boom levels. The trouble was that the system could be gratuitously cruel. If a country went into a recession or its currency weakened, the only remedy was to attract foreign money by forcing prices down, cutting government spending, or raising interest rates—which, in effect, meant throwing people out of work. “No private suffering, no restriction of sovereignty, was deemed too great a sacrifice for the recovery of monetary integrity,” Polanyi wrote.

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The system was sustainable politically only as long as those whose lives it ruined didn’t have a say. But, in the late nineteenth and early twentieth centuries, the right to vote spread. In the twenties and thirties, governments began trying to protect citizens’ jobs from shifts in international prices by raising tariffs, so that, in the system’s final years, it hardened national borders instead of opening them, and engendered what Polanyi called a “new crustacean type of nation,” which turned away from international trade, making first one world war, and then another, inevitable.

In Vienna, Polanyi had heard socialism dismissed as utopian, on the ground that no central authority could efficiently manage millions of different wishes, resources, and capabilities. In “The Great Transformation,” he swivelled this popgun around. What was utopian, he declared, was “the concept of a self-regulating market.” Human life wasn’t as orderly as mathematics, and only a goggle-eyed idealist would think it wise to lash people to a mechanism like the gold standard and then turn the crank. For most of human history, he observed, money and the exchange of goods had been embedded within culture, religion, and politics. The experiment of subordinating a nation to a self-adjusting market hadn’t even been attempted until Britain tried it, in the mid-eighteen-thirties, and that effort had required a great deal of coördination and behind-the-scenes management. “Laissez-faire,” Polanyi earnestly joked, “was planned.”

On the other hand, Polanyi believed that resistance to market forces, which he dubbed “the countermovement,” truly was spontaneous and ad hoc. He pointed to the motley of late-nineteenth-century measures—inspecting food and drink, subsidizing irrigation, regulating coal-mine ventilation, requiring vaccinations, protecting juvenile chimney sweeps, and so on—that were instituted to housebreak capitalism. Because such restraints went against the laws of supply and demand, they were despised by defenders of laissez-faire, who, Polanyi noticed, usually argued “that the incomplete application of its principles was the reason for every and any difficulty laid to its charge.” But what was the alternative? Once the laissez-faire machine started running, it cheerfully annihilated the people and the natural environment that it made use of, unless it was restrained.

Polanyi offered the example of the enclosure movement in sixteenth-century England, when landowners tore down villages and turned common lands into private pastures. The changes brought efficiencies that raised the land’s food yield as well as its value, in the long term improving life for everyone. Enclosure was a good thing, in other words; the numbers said so. In the short term, however, it dispossessed peasants who couldn’t immediately improvise a new living, and it was only because of a countermovement—led in piecemeal fashion by the monarchy, in a long, losing battle with Parliament—that more people didn’t die of exposure and starvation. If you argued that resistance did not compute, you would be right, but the countermovement, though it couldn’t stop progress, shielded people by slowing it down. It made enclosure so gradual that, even three centuries later, the poet John Clare was lamenting its advance in his sonnets.

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In the nineteen-thirties, when Polanyi was first formulating his critique, the British economist John Maynard Keynes was likewise arguing that capitalist economies aren’t self-adjusting. The markets for labor, goods, and money, he showed, don’t find equilibriums independently but through interactions with one another that can have unfortunate, counterintuitive side effects. In hard times, economies tend to retrench, just when stimulus is most needed; the richer they get, the less likely they are to invest enough to sustain their wealth. During the Depression, Keynes made the case that governments should deficit-spend their way out of recessions. By the time Polanyi’s book was published, the Keynesian view had become orthodoxy. For the next few decades, the world’s leading economies were tightly managed by their governments. America’s top marginal tax rate stayed at ninety-one per cent until 1964, and anti-usury laws kept a ceiling on interest rates until the late seventies. The memory of the financial chaos of the thirties, and of the fascism that it gave rise to, was still vivid, and the Soviet Union loomed as an alternative, should the Western democracies fail to treat their workers well.

In terms of international monetary systems, too, Keynesianism held sway. In 1944, at the Bretton Woods Conference, Keynes helped to negotiate a way of harmonizing exchange rates that gave national governments enough elbow room to boost their domestic economies when necessary. Only America continued to redeem its currency with gold. Other nations pegged their currencies to the dollar (making it their reserve currency), but they were free to adjust their currencies’ values within limits when the need arose. Countries were allowed, and sometimes even required, to impose capital controls, measures that limited the cross-border flow of investment capital. With investors unable to yank money suddenly from one country to another, governments were free to spur growth with low interest rates and to spend on social programs without fear that inflation-averse capitalists would sell off their nations’ bonds. So weak was the political power of investors that France, Britain, and America let inflation shrink the value of their war debts considerably. In France, the economist Thomas Piketty has quipped, the period amounted to “capitalism without capitalists.”

Image result for Is Capitalism a Threat to Democracy?Thomas Piketty

 

The result—highly inconvenient for free-market fundamentalists—was prosperity. In the three decades following the Second World War, per-capita output grew faster in Western Europe and North America than ever before or since. There were no significant banking or financial crises. The real income of Europeans rose as much as it had in the previous hundred and fifty years, and American unemployment, which had ranged between fourteen and twenty-five per cent in the thirties, dropped to an average of 4.6 per cent in the fifties. The new wealth was widely shared, too; income inequality plummeted across the developed world. And with the plenty came calm. The economic historian Barry Eichengreen, in his new book, “The Populist Temptation” (Oxford), reports that in twenty advanced nations no populist leader—which he defines as a politician who is “anti-elite, authoritarian, and nativist”—took office during this golden era, and that a far narrower share of votes went to extremist parties than before or after.

“This was the road once taken,” Kuttner writes. “There was no economic need for a different one.” Nevertheless, we strayed—or, rather, in Kuttner’s telling, we were driven off the road after capitalists grabbed the steering wheel away from the Keynesians. The year 1973, in his opinion, marked “the end of the postwar social contract.” Politicians began snipping away restraints on investors and financiers, and the economy returned to spasming and sputtering. Between 1973 and 1992, per-capita income growth in the developed world fell to half of what it had been between 1950 and 1973. Income inequality rebounded. By 2010, the real median earnings of prime-age American workingmen were four per cent lower than they had been in 1970. American women’s earnings rose for a bit longer, as more women made their way into the workforce, but declined after 2000. And, as Polanyi would have predicted, faith in democracy slipped. Kuttner warns that support for right-wing extremists in Western Europe is even higher today than it was in the nineteen-thirties.

But was Keynesianism pushed, or did it stumble? Kuttner’s indignation about its fall from grace is more straightforward than the course of events that led to it. In the years following the Second World War, Europe was swimming with dollars, thanks to the Marshall Plan and American military aid to Europe. Beyond America’s jurisdiction, those dollars slipped free of its capital controls, and in the nineteen-sixties investors began to sling them from country to country as impetuously as in the days before Bretton Woods, punitively dumping the bonds of any government that tried to run an interest rate lower than those of its peers. The cost of the Vietnam War sparked inflation in America, and the dollar’s second life as the world’s reserve currency risked pushing the inflation even higher. When America fell into recession in 1970, the Federal Reserve tried to boost the country out of it by dropping interest rates, and America became a target of opportunity for speculators: capital fled the country, taking gold with it. By May, 1971, the United States was facing its first merchandise trade deficit since 1893, an indication that the high dollar was discouraging foreign buyers. Unwilling to pacify investors by inflicting austerity on voters, President Richard Nixon uncoupled the dollar from gold, ending the Bretton Woods agreement. Then, in October, 1973, Arab nations, upset about America’s solidarity with Israel during the Yom Kippur War, embargoed oil sales to the United States, and the price of crude nearly quadrupled in the space of three months. Food prices skyrocketed, and, as wallets were pinched, the country tumbled into another recession.

At this juncture, a new economic monster appeared: stagflation, a chimera of inflation, recession, and unemployment. Keynesian economists, who didn’t think that high unemployment and inflation could coëxist, were at a loss for how to handle it. The predicament provided an opening for their critics, most notably Milton Friedman, who argued that incessant government stimulation of the economy risked promoting not only inflation but the expectation of inflation, which could then spiral out of control. Friedman declared Keynesianism discredited and demanded that the government refrain from tampering with the economy, other than to manage the money supply.

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In 1974, Alan Greenspan, President Gerald Ford’s economic adviser and an acolyte of Ayn Rand, likewise urged resisting political pressure to help the economy grow. “Inflation is our domestic public enemy No. 1,” Ford declared, and the Federal Reserve raised interest rates. Five years later, when a revolution in Iran set off a second spike in oil prices, a new round of inflation, and yet another recession, President Jimmy Carter’s Federal Reserve chair, Paul Volcker, raised interest rates again and again, to as high as twenty per cent. By 1982, America’s G.D.P. was shrinking 2.2 per cent a year, and unemployment was higher than it had been since the Great Depression. The nation had gone back to stabilizing its currency the old-fashioned way—by throwing people out of work—and utopian faith in self-regulating free markets had made a comeback. Kuttner thinks that this was a terrible mistake, arguing that the inflation of the seventies was limited to particular sectors of the economy such as food and oil. That sounds a little like special pleading. It’s not clear how Ford and Carter could have resisted the pressure they were under to find a new policy solution once it was clear that the old one wasn’t working.

In time, Keynesians adapted their models—one adjustment took into account Friedman’s discovery of the dangers posed by the expectation of inflation—and the resulting synthesis, New Keynesianism, is now canonical. Both the Bush and the Obama Administrations adopted Keynesian policies in response to the financial crisis of 2008. But when stagflation flummoxed the Keynesians it cost them their near-monopoly on political advice-giving, and laissez-faire was rereleased into the political sphere. In January, 1974, the United States removed constraints on sending capital abroad. A 1978 Supreme Court decision overturned most state laws against usury. By the early twenty-first century, Kuttner charges, every New Deal regulation on finance was either “repealed or weakened by non-enforcement.” Starting in the eighties, developing nations found free-market doctrine written into their loan agreements: bankers refused to extend credit unless the nations promised to lift capital controls, balance their budgets, limit taxes and social spending, and aim to sell more goods abroad—an uncanny replica of the austerity terms enforced under the gold standard. The set of policies became known as the Washington Consensus. The idea was pain in the short term for the sake of progress in the long term, but a 2011 meta-analysis was unable to find statistically significant evidence that the trade-off is worth it. Even if it is worth it, Polanyi would have recommended tempering the short-term pain. From 2010, when austerity measures were first imposed on Greece, to 2016, its G.D.P. declined 35.6 per cent, according to the World Bank. A federally appointed panel is now pushing for a similar approach in Puerto Rico.

There is no shortage of villains in Kuttner’s narrative: financial deregulation; supply-side tax cuts; the decline of trade unions; the Democratic Party, which, by zigging left on identity politics and zagging right on economics, left conservative white working-class voters amenable to Donald Trump. Perhaps the most vexed issue Kuttner discusses, however, is trade policy—whether American workers should be protected against cheap foreign goods and labor.

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The contours of the problem call to mind Polanyi’s account of enclosures in early-modern England. Half an hour with a supply-and-demand graph shows that free trade is better for every nation, developed or developing, no matter how much an individual businessperson might wish for a special tariff to protect her line of work. In a 2012 survey, eighty-five per cent of economists agreed that, in the long run, the boons of free trade “are much larger than any effects on employment.” But although free trade benefits a country over all, it almost always benefits some citizens more than—and even at the expense of—others. The proportion of low-skilled labor in America is smaller than in most countries that trade with America; economic theory therefore predicts that international trade will, on aggregate, make low-skilled workers in the United States worse off. The U.S. government has, since 1962, compensated workers laid off because of free trade, but the benefit has never been adequate; only four people were certified to receive it during its first decade. In a 2016 paper, “The China Shock,” the economists David H. Autor, David Dorn, and Gordon H. Hanson wrote that, for every additional hundred dollars of Chinese goods imported to an area, a manufacturing worker is likely to lose fifty-five dollars of income, while gaining only six dollars in government help.

In a laissez-faire utopia, dislodged workers would relocate or take jobs in other industries, but workers hurt by rivalry with China are doing neither. Maybe they don’t have the resources to move; maybe the flood of Chinese-made goods is so extensive that there are no unaffected manufacturing sectors for them to switch into. The authors of “The China Shock” calculate that, between 1999 and 2011, trade with China destroyed between two million and 2.4 million American jobs; Kuttner quotes even higher estimates. NAFTA, meanwhile, lowered the wage growth of American high-school dropouts in affected industries by sixteen percentage points. In “Why Liberalism Failed” (Yale), the political scientist Patrick J. Deneen denounces the assumption that “increased purchasing power of cheap goods will compensate for the absence of economic security.”

Kuttner follows Polanyi in attacking free-market claims of mathematic purity. “Literally no nation has industrialized by relying on free markets,” he writes. In 1791, Alexander Hamilton recommended that America encourage new branches of manufacturing by taxing imports and subsidizing domestic production. Even Britain, the world’s first great champion of free trade, started off protectionist. Kuttner believes that America stopped supporting its manufacturing sector partly because it got into the habit, during the Cold War, of rewarding foreign allies with access to American consumers, and eventually decided that exports of financial services, rather than of manufactured goods, would be the country’s future. Toward the end of the century, as American manufacturers saw the writing on the wall, they shifted production abroad.

Kuttner doesn’t give a full hearing to the usual reply by defenders of laissez-faire, which is that a transition from goods to services is inevitable in a maturing economy—that the efficiency of American manufacturing means that it would likely be shedding workers no matter what the government did. Even Eichengreen, a critic of globalization, notes, in “The Populist Temptation,” that, if you graph the share of the German workforce employed in manufacturing from 1970 to 2012, you see a steady, grim decline very similar to that of its American counterpart, despite the fact that Germany has long spent heavily on apprenticeship and vocational training. The industrial revolution created widely shared wealth almost magically at its dawn: when an unemployed farmworker took a job in a factory, his power to make things multiplied, along with his earning power, without his having to learn much. But, as factories grew more efficient, fewer workers were needed to run them. One study has attributed eighty-seven per cent of lost manufacturing jobs to improved productivity.

When a worker leaves a factory, her power to create wealth stops being multiplied. The only way to increase it again is through education—by teaching her to become a sommelier, say, or an anesthesiologist. But efficiency gains are notoriously harder to come by in service industries than in manufacturing ones. There are only so many leashes a dog walker can hold at one time. As a result, if an economy deindustrializes without securing a stable manufacturing core, its productivity may erode. The dynamic has caused stagnation in Latin America and sub-Saharan Africa, and there are signs of a comparable weakening of America’s earning power.

Meanwhile, in the factories that remain, machines have grown more complex; the few workers they employ need to be better educated, further widening the gap between educated and uneducated workers. Kuttner dismisses this labor-skills explanation for job loss as an “alibi” with “an insulting subtext”: “If your economic life has gone to hell, it’s your fault.” This is intemperate but, in Kuttner’s defense, he has been warning American politicians to protect manufacturing jobs since 1991, and has been enlisting Polanyi in the cause for at least as long. Moreover, he has a point: to talk about productivity-induced job loss when challenged to explain trade-induced job loss is to change the subject. Economists estimate that advances in automation explain only thirty to forty per cent of the premium that a college degree now adds to wages. And though Eichengreen is right about manufacturing’s declining share of the German workforce, it still stood at twenty per cent in 2012, which is roughly where the American share stood three decades earlier, and the German decline has been less steep. Somehow, Germany’s concern for its manufacturing workforce made a difference.

In any case, if one’s concern is populism, it may not matter whether jobs have been lost to trade competition or to automation. In areas where more industrial robots have been introduced, one analysis shows, voters were more likely to choose Trump in 2016. According to another analysis, if competition with Chinese imports had been somehow halved, Michigan, Wisconsin, and Pennsylvania would likely have chosen Hillary Clinton that year. Economic explanations like these have been challenged. In April, the political scientist Diana C. Mutz published a paper finding that Trump voters were no more likely than Clinton ones to have suffered a personal financial setback; she concluded that Trump’s victory was more likely caused by white anxiety about loss of status and social dominance. But it’s not surprising that Trump voters weren’t basing their decisions on their personal circumstances, because voters almost never do. And Mutz’s own results showed that the factors most likely to lead to a Trump vote included pessimism about the economy and preferring Trump’s position on China to Clinton’s. It may not be possible to untangle economic anxiety and a more tribal mind-set.

Casting about for a Polanyi-style countermovement to temper the ruthlessness of laissez-faire, Kuttner doesn’t rule out tariffs. They’re economically inefficient, but so are unions, and, for a follower of Polanyi, efficiency isn’t the only consideration. A decision about a nation’s economic life, the Harvard economist Dani Rodrik writes, in “Straight Talk on Trade” (Princeton), “may entail trading off competing social objectives—such as stability versus innovation—or making distributional choices”; that is, deciding who gains at whose expense. Such a decision should therefore be made by elected politicians rather than by economists. America imposed export quotas on Japan in the seventies and eighties, to the alarm of headline writers at the time: “Protectionist Threat,” the Times warned. But Rodrik, looking back, judges the measures to have been reasonable ad-hoc defenses—“necessary responses to the distributional and adjustment challenges posed by the emergence of new trade relationships.”

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Trump’s chief trade negotiator served on the Reagan team that administered quotas against Japan. A similar approach today, however, seems unlikely to work on China, whose economy is much more messily enmeshed with America’s. You probably can’t name as many Chinese brands as Japanese ones, even though you probably buy more Chinese-made products, because they are sold to Americans by American companies. American workers may wish they had been shielded from the effects of trade with China, but American businesses, by and large, don’t. Perhaps that’s why Trump has escalated from a tariff on steel and aluminum to erratic threats of a trade war. To achieve his campaign goal of bringing manufacturing jobs home from China, he will have to not only impose tariffs but also convince multinationals that the tariffs will stay in place beyond the end of his Administration. Only then will executives calculate that they can’t just wait it out—that they have no choice but to incur the enormous costs and capital losses of abandoning investments in China and making new ones here. It’s hard to imagine such a scheme working, unless Trump establishes a political command over the private sector not seen in America since the forties. That can’t be ruled out, given the state of affairs in Russia, China, Hungary, and Turkey, but it seems more likely that Trump’s bluster will merely motivate businesses to be deferential to him, in pursuit of favorable treatment.

“Basically there are two solutions,” Polanyi wrote in 1935. “The extension of the democratic principle from politics to economics, or the abolition of the democratic ‘political sphere’ altogether.” In other words, socialism or fascism. The choice may not be so stark, however. During America’s golden age of full employment, the economy came, in structural terms, as close as it ever has to socialism, but it remained capitalist at its core, despite the government’s restraining hand. The result was that workers shared directly in the country’s growing wealth, whereas today proposals for fostering greater financial equality hinge on taxing winners in order to fund programs that compensate losers. Such redistributive measures, Kuttner observes, are only “second bests.” They don’t do much for social cohesion: winners resent the loss of earnings; losers, the loss of dignity.

Can we return to an equality in workers’ primary incomes rather than to one brought about by secondary redistribution? In a recent essay for the journal Democracy, the Roosevelt Institute fellow Jennifer Harris recommends reimagining international trade as an engine for this rather than as an obstacle to it. When negotiating trade deals, for instance, governments could make going to bat for multinationals conditional on their agreeing to, say, pay their workers a higher fraction of what they pay executives.

Failing that, we’d be better off with redistributive programs that are universal—parental leave, national health care—rather than targeted. Benefits available to everyone help people without making them feel like charity cases. Kuttner reports great things from Scandinavia, where governments support workers directly—through wage subsidies, retraining sabbaticals, and temporary public jobs—rather than by constraining employers’ power to fire people. “We won’t protect jobs,” Sweden’s labor minister recently told the Times. “But we will protect workers.” Income inequality in Scandinavia is lower than here, and a larger proportion of citizens work. Maybe a government can insure higher pay for its workers by treating them as if they were, in and of themselves, valuable. True, Denmark’s spending on its labor policies has at times risen to as high as 4.5 per cent of its G.D.P., more than the share America spends on defense, and studies show that diverse countries such as ours find it harder to muster social altruism than more racially and culturally homogenous ones do. Nonetheless, programs like Social Security and Medicare, instituted when a communitarian ethic was still strong in American politics, remain popular. Why not try for more? It might make sense even if the numbers don’t add up. ♦

This article appears in the print edition of the May 14, 2018, issue, with the headline “Merchants of Doom.”

The de-dollarization in China


April 10, 2018

The de-dollarization in China

 

The US dollar is so important in today’s economy for three main reasons: the huge amount of petrodollars; the use of the dollar as the world’s reserve currency and the decision taken by US President Nixon in 1971 to end the dollar convertibility into gold.

The US currency is still a large part of the Special Drawing Rights (SDR), the IMF’s “paper money”. A share ranging between 41% and 46% depending on the periods.

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Petrodollars emerged when Henry Kissinger dealt with King Fahd of Saudi Arabia, after “Black September” in Jordan.

The agreement was simple. Saudi Arabia had to accept only dollars as payments for the oil it sold, but was forced to invest that huge amount of US currency only in the US financial channels while, in return, the United States placed Saudi Arabia and the other OPEC neighbouring countries under its own military protection.

Hence the turning of the dollar into a world currency, considering the importance and extent of the oil market. Not to mention that this large amount of dollars circulating in the world definitely marginalized gold and later convinced the FED that the demand for dollars in the world was huge and unstoppable.

An unlimited amount of liquidity that kept various US industrial sectors alive but, above all, guaranteed huge financial markets such as the derivatives – markets based on the structural surplus of US liquidity.

After the Soviet Union’s collapse, the United States always thought about world’s hegemony and, above all, imagined to oppose the already active Eurasian union between China, Iran and Russia – the worst nightmare for US decision-makers – both at military and financial levels.

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As early as those years, following Brzezinsky’s policy line, the US analysts warned against the unification of Eurasia – to be absolutely prevented – and against the subsequent reunification of Eurasia with the Eurasian peninsula, to be avoided even with a war.

At that time, the three aforementioned States still conducted their business in dollars: China wanted to keep on becoming the “world factory”; Russia had run out of steam and was near breaking point; Iran had to inevitably adapt to the rest of Sunni OPEC.

With Putin’s rise to power, Russia’s de-dollarization began immediately. The share of dollar reserves declined year after year, while Putin proposed new oil contracts. Since last year, for example, dollars cannot be used in ports.

In the case of Iran, the sanction regime – in particular – has favoured the discovery of means other than the dollar for international settlements. The operations and signs of the de-dollarization continued.

The war in Iraq against Saddam Hussein was also a fight against the Rais who wanted to start selling his oil barrels in euros, while the war in Afghanistan was viewed by China as part of the ongoing overall encirclement of its territory.

Hence the importance of the Belt and Road Initiative. Also the war in Afghanistan was an attempt to stop the Eurasian project of economic and commercial (as well as political) union between Russia, Iran and China.

As further sanction, the United States has removed Iran from the SWIFT network, the well-known world interbank transfer system, which is also a private company.

Iran, however, has immediately joined the Chinese CIPS, a recent network, similar to SWIFT, with which it is already fully connected.

Basically China’s idea is to create an international currency based on the IMF’s Special Drawing Rights and freely expendable on world markets, in lieu of the US dollar, so as to avoid “the dangerous fluctuations stemming from the US currency and the uncertainties on its real value “- just to quote the Governor of the Chinese central bank, Zhou Xiao Chuan, who will soon be replaced by Yi Gang.

In the meantime, Russia and China are acquiring significant amounts of gold. In recent years China has bought gold to the tune of at least 1842.6 tons, but the international index could be distorted, as many transactions on the Shanghai Gold Exchange are Over the Counter (OTC) and hence are not reported.

Again according to official data, so far Russia is supposed to have reached 1857.7 tons. Both countries have so far bought 10% of the gold available in the world.

Meanwhile, Saudi Arabia has already accepted payments in yuan for the oil sold to China, which is its largest customer. This is a turning point. If Saudi Arabia gives in, sooner or later all OPEC countries will follow suit.

In many cases, India and Russia have already traded with Iran by accepting oil in exchange for primary goods and commodities.

China has also opened a credit line with Iran amounting to as many as 10 billion euros, with a view to getting around sanctions. It is also assumed that North Korea uses cryptocurrencies to buy oil from China.

As devastated as its economy is, Venezuela no longer sells its oil in dollars – and it is worth recalling it can boast the largest world reserves known to date.

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Furthermore, China will buy gas and oil from Russia in yuan, with Russia being able to convert yuan into gold directly on the Shanghai International Energy Exchange.

Keynes’ “tribal residue” takes its revenge. So far the agreements for trade in their respective currencies were signed between China and Kazakhstan (on December 14, 2014),between China and South Africa (on April 10, 2015) and between Russia and India (on May 26, 2015) while, at the end of November 2015, the Russian central bank included the yuan into the list of currencies that can be accepted as reserves.

On November 3, 2016 an agreement was signed between Turkey and Russia for the exchange of their currencies and in October 2017 a similar agreement was reached between Turkey and Iran.

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For financial institutions, the de-dollarization continued with the establishment of the BRICS Fund worth 100 billion dollars (on July 16, 2014) and with the establishment – on January 16, 2016 – of the Asian Infrastructure Investment Bank (AIIB), made up of 57 member countries, including Italy, which automatically caused the US anger.

In May 2015 the Russian-Chinese Investment Bank was created, followed in July 2015 by the opening of the new bank for the development of BRICS, based in Shanghai. In November 2015, however, Iran approved the establishment of a bank together with Russia.

It is worth underlining that in April 2015 the Russian national credit card system was opened, dealing also with small currency transfers.

It is also worth recalling the Duma law on de-offshorization of November 18, 2014, i.e. the legislation obliging the Russian companies resident abroad to pay taxes directly to the Russian Treasury.

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The above mentioned Chinese CIPS started operating in October 2015, while in March 2017 Russia implemented a system similar to SWIFT (interacting with the Chinese one).

The issue is complex because with fracking, the United States has become the first oil producer – hence there is less need to keep the huge amount of petrodollars. This happens while a natural oil and gas shale deposit has just been discovered, off the coast of Bahrain, with reserves of 80 billion oil barrels and 4 trillion cubic meters of gas.

The United States does no longer buy oil and gas because it does not need them, but China is increasingly the best global buyer.

Apart from the stability of gas and oil prices, which should be guaranteed in the coming years, China and its allies should be ever more able to select between the supply and, certainly, between the countries which accept the non-oil bilateral exchange with China and payments in yuan or gold.

Still today, the US GDP accounts for 22% of world’s GDP, while 80% of international payments are made in dollars.

Hence the United States receives goods from abroad always at comparatively very low prices, while the massive demand for dollars from the rest of the world allows to refinance the US public debt at very low costs. This is the economic and political core of the issue.

In fact, the Russian government held a specific meeting on de-dollarization in spring 2014.

This is another fact to be highlighted. It is a political operation that appears to be a financial one, often in contrast with the “volatility” of current markets, but its core is strategic and geopolitical.

In theory, the de-dollarization regards three specific issues: payments, the real economy issue and ultimately the financial issue, namely the financial contracts denominated in dollars.

In the first case, China will tend to eliminate every transaction denominated in US dollars by third countries and to remove settlement mechanisms involving the dollar and operating in its neighbouring areas.

In the second case, the dollar transactions will be – and are already – largely prohibited for individuals.

In the third case, the share of foreign contracts denominated in yuan is now equal to 40% and strong acceleration will be recorded in 2018.

The oil futures denominated in yuan are now booming. The first attempt was made in 1993, when China opened its stock exchanges in Beijing and Shanghai.

China itself closed operations two years later, due to market instability and to the yuan weakness. Two other things have changed since then: in 2016 the yuan was admitted as a currency making up the IMF Special Drawing Rights and in 2017 China overtook the United States as the world’s largest oil importer.

Hence, thanks to the oil futures denominated in yuan, China is reducing its dependence on the dollar and, in the meantime, it is supporting its oil imports, as well as promoting the use of the yuan globally and expanding its presence in the world. Russia has done the same.

Therefore the United States is about to be ousted as world’s currency due to its continuous series of wars and military failures (former President Cossiga always told me: “The United States is always on the warpath and up in arms, but then it is not able to get out of it”) and, like everyone else, it shall pay for its public debt, which is huge and will be ever more its problem, not ours.

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Here it is worth recalling what the US Treasury Secretary, John Connally, said to his European counterparts during a meeting in 1971: “The dollar is our currency, but your problem”.

Obviously, in relation to all these issues which also concern primarily the euro, the European Union is silent and sleepy.

Paul Krugman: What’s the Matter with Trumpland?


April 4, 2018

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Jack Ma –What’s the Matter with this American President?

These days almost everyone has the (justified) sense that America is coming apart at the seams. But this isn’t a new story, or just about politics. Things have been falling apart on multiple fronts since the 1970s: Political polarization has marched side by side with economic polarization, as income inequality has soared.

And both political and economic polarization have a strong geographic dimension. On the economic side, some parts of America, mainly big coastal cities, have been getting much richer, but other parts have been left behind. On the political side, the thriving regions by and large voted for Hillary Clinton, while the lagging regions voted for Donald Trump.

I’m not saying that everything is great in coastal cities: Many people remain economically stranded even within metropolitan areas that look successful in the aggregate. And soaring housing costs, thanks in large part to Nimbyism, are a real and growing problem. Still, regional economic divergence is real and correlates closely, though not perfectly, with political divergence.

But what’s behind this divergence? What’s the matter with Trumpland?

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Trump won 2016 Presidential Elections but he is breaking up American society on the pretext of draining the swamp in Washington DC. The Republican leaders in the House (Paul Ryan) and the Senate (Mitch McConnell) are helping Trump do it.–Din Merican

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Regional disparities aren’t a new phenomenon in America. Indeed, before World War II the world’s richest, most productive nation was also a nation with millions of dirt-poor farmers, many of whom didn’t even have electricity or indoor plumbing. But until the 1970s those disparities were rapidly narrowing.

Take, for example, the case of Mississippi, America’s poorest state. In the 1930s, per-capita income in Mississippi was only 30 percent as high as per-capita income in Massachusetts. By the late 1970s, however, that figure was almost 70 percent — and most people probably expected this process of convergence to continue.

But the process went into reverse instead: These days, Mississippi is back down to only about 55 percent of Massachusetts income. To put this in international perspective, Mississippi now is about as poor relative to the coastal states as Sicily is relative to northern Italy.

Mississippi isn’t an isolated case. As a new paper by Austin, Glaeser and Summers documents, regional convergence in per-capita incomes has stopped dead. And the relative economic decline of lagging regions has been accompanied by growing social problems: a rising share of prime-aged men not working, rising mortality, high levels of opioid consumption.

An aside: One implication of these developments is that William Julius Wilson was right. Wilson famously argued that the social ills of the nonwhite inner-city poor had their origin not in some mysterious flaws of African-American culture but in economic factors — specifically, the disappearance of good blue-collar jobs. Sure enough, when rural whites faced a similar loss of economic opportunity, they experienced a similar social unraveling.

So what is the matter with Trumpland?

For the most part I’m in agreement with Berkeley’s Enrico Moretti, whose 2012 book, “The New Geography of Jobs,” is must reading for anyone trying to understand the state of America. Moretti argues that structural changes in the economy have favored industries that employ highly educated workers — and that these industries do best in locations where there are already a lot of these workers. As a result, these regions are experiencing a virtuous circle of growth: Their knowledge-intensive industries prosper, drawing in even more educated workers, which reinforces their advantage.

And at the same time, regions that started with a poorly educated work force are in a downward spiral, both because they’re stuck with the wrong industries and because they’re experiencing what amounts to a brain drain.

While these structural factors are surely the main story, however, I think we have to acknowledge the role of self-destructive politics.

That new Austin et al. paper makes the case for a national policy of aiding lagging regions. But we already have programs that would aid these regions — but which they won’t accept. Many of the states that have refused to expand Medicaid, even though the federal government would foot the great bulk of the bill — and would create jobs in the process — are also among America’s poorest.

Or consider how some states, like Kansas and Oklahoma — both of which were relatively affluent in the 1970s, but have now fallen far behind — have gone in for radical tax cuts, and ended up savaging their education systems. External forces have put them in a hole, but they’re digging it deeper.

And when it comes to national politics, let’s face it: Trumpland is in effect voting for its own impoverishment. New Deal programs and public investment played a significant role in the great postwar convergence; conservative efforts to downsize government will hurt people all across America, but it will disproportionately hurt the very regions that put the G.O.P. in power.

The truth is that doing something about America’s growing regional divide would be hard even with smart policies. The divide will only get worse under the policies we’re actually likely to get.

A version of this article appears in print on , on Page A23 of the New York edition with the headline: What’s the Matter With Trumpland?. Order Reprints | Today’s Paper | Subscribe